Do I need income protection insurance?

Do I need income protection insurance?
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Income protection insurance can be an excellent safeguard to your standard of living. It can also be quite a complicated form of insurance to consider. I’m going to explain everything you need to know so you can decide if income protection cover is useful to you.

What is income protection insurance?

Income protection insurance (IPI) is designed to provide replacement income if you’re unable to work due to illness or long-term disability.

Income protection cover can also provide benefits for homemakers. Paid help may be required if you’re unable to maintain a household.

The cover only replaces around 50-70% of gross income. This is to encourage people to return to work if it’s possible.

Policies may also provide a partial benefit. So if you return to work on lower pay, benefits might continue to top-up your income.

Benefits going directly to the insured person are paid as tax-free income.

Plans have an agreed term. This could be up until the policyholder’s retirement date, or a specified length.

What does it cover?

Coverage will depend on your policy. Always check through all documents and benefits when taking out a policy.

An income protection insurance policy will cover most medical illnesses and disabilities. Typically, it will cover you if you are unable to perform your job.

Exclusions tend to be more common for IPI policies compared to something like life insurance. Typical exclusions include:

  • Pre-existing conditions
  • Pregnancies
  • Self-inflicted injuries
  • Alcohol or drug abuse
  • Injuries resulting from adventure sports or dangerous hobbies

Does it cover you if you lose your job?

Yes, but with some conditions. Income protection insurance will cover you losing your job due to illness or an accident.

If you have a current IPI policy, this might pay out if you’re laid off. However, due to the coronavirus pandemic, most insurers are no longer including any kind of unemployment or redundancy cover.

Should self-employed people use income protection insurance?

Absolutely. At the very least, it should be a consideration.

If you’re self-employed, you’re more at risk than others if you’re unable to work. As a self-reliant worker, you have no employer to provide benefits.

There are some state disability and sickness benefits, but they are minimal. If you want to maintain your standard of living, some kind of protection is vital.

How long can it be claimed for?

This will depend on the policy.

Some policies will provide benefits until you recover and return to work, reach retirement age, or die (whichever happens first). These IPI policies usually carry a higher premium.

Other policies have a limited claim period or a maximum number of monthly benefit payments.

Usually, these limits apply to the whole life of the policy. So if you had a 24-month benefit limit, you could split that entitlement between different events during the policy.

How much does it cost?

IPI is specific to individuals and chosen policy terms. So there’s no one-size-fits-all price structure.

The best thing to do is to look at a range of quotes online.

This is free to do and you can get an accurate price based on your circumstances.

What else impacts income protection insurance?

There are a few important things that can affect IPI cover. If you’re an adrenaline junkie, your exciting hobbies could mean higher premiums.

Other key considerations include your:

  • Age
  • Medical history
  • Occupation

Most policies have a deferral period, during which time no benefits are payable. A longer deferral period usually means lower premiums.

It’s best to use a deferral period alongside any employer benefit. So if your company provides six months of sick pay, it can make sense to have a six-month deferral period.

For the self-employed, a shorter deferral period can be more useful.


Income protection insurance is an important lifeline if the unexpected happens, especially if you’re self-employed.

IPI can allow you to maintain your standard of living if you can’t work.

Be sure to check whether your employer offers any benefits. Then you can create a policy around any existing protection. Creating an emergency fund should also be a priority.

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